Medical Debts Sent to Collections Can Be a Nightmare

People with unpaid medical bills are finding themselves in a “haphazard system” of debt collection, in which some consumers don’t realize they owe money or are still waiting for bills when their debt is sent to a collections agency, a U.S. regulator says.

The Consumer Financial Protection Bureau on Thursday issued a study highlighting concerns about how consumers are treated when their medical bills are sent to collections.

It comes as CFPB officials are working on a proposal for new consumer protections for the debt-collection market.  Those rules, expected to be unveiled next year, are likely to target the kinds of practices criticized by the CFPB.

“When people fall ill and end up at the hospital with unexpected bills, far too often they have entered into a financial maze,”  said Richard Cordray, the CFPB’s director, in remarks prepared for a speech Thursday in Oklahoma.  Medical debt, he said, “can reflect the complexity, confusion, and delays that characterize medical billing and insurance reimbursement rather than the consumer’s ability or willingness to pay their debts.”

The CFPB found that 43 million Americans have unpaid medical debt on their credit reports, and that more than half of all debt on credit reports is from medical expenses. Unlike an unpaid credit-card or cellphone bill, consumers often have little to no knowledge of what they owe to a hospital or another medical provider, CFPB officials say.

Consumers are often frustrated when they receive demands for money that has already been paid. For example, an analysis of complaints to the CFPB about debt-collection issues found that 20% of medical-debt-collection complaints involved borrowers who said their debts had already been paid, compared with 8.5% of complaints about other kinds of debts.

Mr. Cordray said a lack of consistency in the industry creates confusion for consumers. Medical debts have no standard time frames for reporting. Some doctors or hospitals send debt to collections 30 days after a bill is unpaid, and others wait up to 180 days, Mr. Cordray said.

At the time a debt is sent to a collections company, “a consumer might be unaware of a charge, still be waiting for a bill, or think they have already paid,” Mr. Cordray said.

The CFPB found that the average unpaid medical debt is $579, compared with several thousand dollars for credit cards or student loans.

Earlier this year, the CFPB  put pressure on the credit-reporting industry to deemphasize the impact of unpaid medical debt on borrowers’ credit scores.  In August, Fair Isaac Corp. said it would give less weight to unpaid medical bills that are with a collection agency in its FICO credit-score calculations.

The CFPB has also put pressure on lenders and debt collectors to do a better job of fixing mistakes in consumers’ credit reports.

On Thursday, the CFPB said it would require major credit-reporting firms such as Equifax, TransUnion and Experian to provide the regulator with reports listing which companies and industries have the most disputes with consumers.

The regulator expects the credit-reporting firms to “investigate the source of the disputes, identify any problems, and take necessary action,” Mr. Corday said.